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Financial Ratio Analysis And Interpretation Services

Do you know what is a ratio analysis and do you conduct the same for your business? If not, you are missing out on meaningful business interpretation. Ratio Analysis refers to comparing different items appearing in the books of accounts or financial statements to give a precise and understandable interpretation. Financial ratio analysis is a way of understanding its health in terms of its liquidity and profitability. One common interest of stakeholders, including the company itself, is to assess how efficiently a company is operating by analyzing revenue, liquidity, and profitability.

A reading of financial statements likely won’t provide all the information necessary for readers, meaning it is necessary to put numbers in a specific format to understand better different aspects of your company’s operations and its health. We at Whiz Consulting can take charge of your accounting needs with advanced skills in ratios analysis. We offer accounting services that identify and calculate ratios in the format you need them. Our accounting experts are prepared to factor in varying ratios to give you an in-depth understanding of your company’s financial performance. We help simplify various aspects of your company that would not be apparent from just looking at the financial statements.

Types of Ratios Analysis:

Profitability ratios:

It compares the company’s ability to earn or generate revenue with its expenses to arrive at the desired return rate and recognise any shortfall. It includes ratios like-

  • Gross Profit Ratio
  • Operating Profit Ratio
  • Net Profit Ratios
  • Interest Coverage Ratio

Liquidity ratios:

It measures the ability of a company to pay its day-to-day debt on time. It is a crucial ratio or test to determine its ability to cover short-term obligations and cash flow. It includes the ratios like-

  • Current Ratio
  • Working Capital Ratio
  • Quick Ratios etc.

Return on Investment Ratios:

Return on Investment or Return on Assets measures the amount of return on investment concerning the investment cost. It is a broad measure of investment profitability. It includes the ratios like-

  • Return on Equity
  • Return on Assets

Efficiency Ratios or Activity Ratio:

It measures how well a company operates its assets to generate income. It also signifies the time a company takes to collect cash from the customer or the time it takes to convert inventory into cash that is making sales. The management, investors, and creditors also use these ratios to assess the profitability of the company’s operation. It includes the ratios like-

  • Inventory Turnover Ratio
  • Inventory Days
  • Accounts Receivable Ratio
  • Accounts Receivable Days
  • Accounts Payable Ratio
  • Accounts Payable Days
  • Working Capital Turnover
  • Cash Turnover

Solvency Ratios & Leverage Ratios:

These ratios measure the company’s ability to make payments and pay off its long-term obligations to creditors. A balanced solvency & leverage ratios indicate a more creditworthy and financially sound company in the long term. It includes the ratios like-

  • Debt to Equity
  • Debt to Capital
  • Debt to Tangible Net Worth
  • Total Liabilities to Equity
  • Total Assets to Equity
  • Debt to EBITDA

Market Ratios:

These ratios help to understand the economic status of the stock of a particular public traded company. They determine the connection between the price per share of a company and its earnings, growth, and assets, or we can say it helps indicate the value of a company. It includes the Ratios like-

  • Dividend Yield
  • Earnings Per Share
  • Price Earnings Ratio

Benefits of Accounting Ratios:

Whiz Consulting provides accounting expertise in analysing your financial performance regarding ratios, ensuring that you are giving the best accounting practices.

Simplification of Complex Numbers

The prime benefit of accounting ratios is - simplification. By breaking down complex accounting and financial information into ratios, it’s easier to see how a company is performing on its efficiency, solvency, financial efficiency, etc.

Measure Trends

Ratios allow a business to look over time at how things have been running. Managers will identify band trends and set priorities for the future.

Facilitates Industry Comparison

Ratios can help make comparisons more accurate as they can demonstrate how a company is managing itself compared to its competitors in the industry. Your Ratios might illustrate how you compare to different sectors within your industry.

Frequently Asked Questions (FAQs)

Ratio analysis is the practice of comparing two or more items of financial data of a business’s financial statements. Financial ratio analysis helps businesses to know their profitability, liquidity state, leveraging control, efficiency, ROI, and the economic status of the stock in the case of a public traded company.
Financial statements are generally complex and packed with insufficient numbers to provide complete information to the readers or stakeholders at first impression on their own. Financial ratio analysis allows stakeholders to understand this data with the help of an easier and more understandable format. It also allows the top management in the decision-making process by providing fewer data to review than the entire set of books of accounts.
One major limitation of financial ratio analysis is that a single ratio can not help you understand your financial health. So you must calculate multiple ratios to come to some conclusion. Another limitation is that it is based on quantitative aspects of the firm and neglects qualitative aspects of the firm.
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